Permission to Discontinue Filing Consolidated Returns  
Florida Statutes § 220.131 permits an election to file a consolidated Florida corporate income tax return on behalf of affiliate groups. Subsection (3) of that statute also provides that the filing of a consolidated Florida return for any taxable year requires the continued filing of consolidated returns . . . unless the director consents to the filing of separate returns. The Department has promulgated an implementing rule. FAC Rule 12C-1.0131(3)(b) requires that permission be sought not less than 90 days prior to due date for the consolidated return, including extensions. It also conditions permission to deconsolidate upon “agreement between the taxpayer and the Executive Director [or designee] to the terms, conditions, and adjustment under which the change will be effected. The rule lists a variety factors to be considered, including the net effect of changes in Chapter 220 and the Internal Revenue Code, and “changes in law and circumstances.”

The Department acts on such requests through the issuance of a Technical Assistance Advisement, similar to a Private Letter Ruling. It has issued numerous rulings in response to such requests over the last few years, most of them approving deconsolidation and the filing of separate returns. Two recent rulings, one favorable and one adverse, point out the Department’s considerable discretion in allowing deconsolidation and some of the factors it considers most important.

In TAA 04C1-006, August 30, 2004, the Taxpayer had gone through forced bankruptcy, gone through reorganization, made several acquisitions, divested some holdings and discontinued some lines of business. The Department considered those changes sufficient to allow State-level deconsolidation even though the group was going to continue filing consolidated federal returns. In the Department’s words, “the magnitude of [the changes] affect the prudence of continuing to file a consolidated basis for Florida corporate income tax purposes.” Key to the granting of permission was the fact that the changes were “the result of economic conditions and not tax planning.” One must also assume that the Department was positively inclined by the fact that the included “intangible holding companies will file separate Florida income tax returns.” When considering such requests, the Department routinely requires that the taxpayer filed pro forma returns for the change year showing the difference in Florida tax liabilities on a consolidated and separate return basis, and considers any large decrease in that first year a negative factor. It also conditions approval upon the absence of any realized but unrecognized income or expense items that might be recognized at a later date, or requires that they be recognized on the final consolidated return. Furthermore, it prohibits the deconsolidating group from becoming part of a Florida consolidated return for some years following deconsolidation, typically 10 years.

Standing in contrast is TAA 04C1-008, December 22, 2004, in which the Department denied the request to break the group apart for future Florida return purposes. The old parent (P) was commercially domiciled in Florida. It was acquired in a reverse merger in which P was deemed the surviving entity even though control was now in the acquiring company, reflected among things in a change out of the controlling officers and directors and the closing of old P’s Florida corporate headquarters.. Several of old P’s operating subsidiaries were merged into P, this and other changes described as efforts to centralize operations and reduce inefficiencies. The Department found the changes insufficient to warrant the filing of separate Florida returns, relying in no small part upon the fact that “the Taxpayer chose to structure its merger with Old Parent Company as a reverse acquisition with the tax attributes of Old Parent Company surviving, instead of the Taxpayer’s tax attributes.” The Department also observed that the underlying business was the same before and after the acquisition. A closing admonition concerning the importance of “full disclosure of all relevant facts” suggests that the Department was uncertain it had a complete picture.

What the Department will consider a triggering change in facts or circumstances warranting deconsolidation is difficult to predict with any certainty. It is clear that the more the changes are externally dictated, that is by the marketplace of dealings with unrelated parties, and appear not to be motivated purely by plans to truncate Florida tax liabilities, and the more they reflect changes in the business or lines of business the group is engaged in, the better the chances that permission will be granted.

Posted: 2005-03-10 00:00:00.0

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